Owners cannot legally 'control' themselves with contracts
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10-29-2012, 03:02 PM
Join Date: Jan 2005
Originally Posted by
How does MLS operate? Random distribution, distributing by 'player rating' or maximizing revenues for the league overall?
The most concise description I've seen of their operating model is in Judge Boudin's ruling in Fraser v MLS - which upheld MLS's Single Entity defense against anti trust challenge.
MLS has, to say the least, a unique structure, even for a sports league. MLS retains significant centralized control over both league and individual team operations. MLS owns all of the teams that play in the league (a total of 12 prior to the start of 2002), as well as all intellectual property rights, tickets, supplied equipment, and broadcast rights. MLS sets the teams' schedules; negotiates all stadium leases and assumes all related liabilities; pays the salaries of referees and other league personnel; and supplies certain equipment.
At issue in this case is MLS's control over player employment. MLS has the “sole responsibility for negotiating and entering into agreements with, and for compensating, Players.” In a nutshell, MLS recruits the players, negotiates their salaries, pays them from league funds, and, to a large extent, determines where each of them will play. For example, to balance talent among teams, it decides, with the non-binding input of team operators, where certain of the league's “marquee” players will play.
However, MLS has also relinquished some control over team operations to certain investors. MLS contracts with these investors to operate nine of the league's teams (the league runs the other three). These investors are referred to as operator/investors and are the co-defendants in this action. Each operator/investor has the “exclusive right and obligation to provide Management Services for a Team within its Home Territory” and is given some leeway in running the team and reaping the potential benefits therefrom.
Specifically, the operator/investors hire, at their own expense and discretion, local staff (including the general managers and coaches of their respective teams), and are responsible for local office expenses, local promotional costs for home games, and one-half the stadium rent (the same portion as MLS). In addition, they license local broadcast rights, sell home tickets, and conduct all local marketing on behalf of MLS; agreements regarding these matters do not require the prior approval of MLS. And they control a majority of the seats on MLS's board, the very same body which runs the league's operations. Among other things, the board is responsible for hiring the commissioner and approving national television contracts and marketing decisions, league rules and policies (including team player budgets), and sales of interests.
The operator/investors also play a limited role in selecting players for their respective teams. While the operating agreements provide that the operator/investors will not bid independently for players against MLS, they may trade players with other MLS teams and select players in the league's draft. Such transactions, however, must follow strict rules established by the league. Most importantly, no team may exceed the maximum player budget established by the management committee.
In return for the services of the operator/investors, MLS pays each of them a “management fee” that corresponds (in large part) to the performance of their respective team. The management fee equals the sum of one-half of local ticket receipts and concessions; the first $1,125,000 of local broadcast revenues, increasing annually by a percentage rate, plus a 30% share (declining to 10% by 2006) of any amount above the base amount; all revenues from overseas tours; a share of one-half the net revenues from the MLS Championship Game and a share of revenues from other exhibition games.
The remaining revenues of the league are distributed in equal portions to all investors. Thus, while the investors qua investors share equally in the league's profits and losses, the individual team operators qua operators fare differently depending at least in part on the financial performance of their respective teams. It bears mentioning, however, that neither the league nor, apparently, any of its teams has yet made a profit.
Although the league retains legal title to the teams, the operator/investors may transfer their operating rights, within certain limits, and retain much of the value created by their individual efforts and investments. Investors may transfer their ownership stakes and operating rights to other current investors without obtaining prior consent; transfers to outside investors, however, require a two-thirds majority vote of the board. For its part, MLS may terminate any operating agreement on its own initiative if, by a two-thirds vote of the board, an operator/investor is determined to have failed to act in the best interests of the league. If so, it must still pay such operator/investor fair market value for its operating rights and ownership interest.
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